Strasbourg University - LARGE Research Center - EM Strasbourg Business School
The disposition effect is a well established phenomenon in the empirical and experimental financial literature. It leads to sell winners too early and to hold losers too long. In this paper, we first show that this phenomenon has two non negligible consequences. It decreases the welfare of individuals and increases the risk premium required by investors. In fact, when agents know they can suffer from this bias at a future date, they are also conscious that the probability distribution of their final wealth will exhibit negative skewness and will then be different from the final probability distribution of their initial portfolio. It may lead these investors to require a greater risk premium to invest in stocks.
Number of Pages in PDF File: 28
Keywords: disposition effect, equity premium puzzle, loss aversion, behavioral finance